Stocks are ignoring the lack of a stimulus package from Congress, but that could change

17-08-2020

Stocks are ignoring the lack of a stimulus package from Congress, but that could change

Stocks could hang at record levels but gains may be capped until Congress agrees to a new stimulus package to help the economy and the millions of unemployed Americans. Stocks were higher in the past week, and the S&P 500 flirted with record levels it set in February. It ended the week up 0.6% at 3,372. In the coming week, there are some major retailers reporting quarterly results, including Walmart, Home Depot and Target, but the earnings season is mostly over and the market is entering a quiet period. There are minutes from the Fed’s last meeting, released Wednesday, and housing data, including starts Tuesday and existing sales Friday. Investors had been watching efforts by Congress to agree to a new stimulus package, but talks have failed and the Senate has gone on recess. There is a concern that Congress will not be convinced to provide a big enough package when it does get to work again on the next stimulus round because recent economic reports look stronger. July’s retail sales, for example, climbed to a record level and recovered to pre-pandemic levels.

“The juxtaposition of getting more fiscal stimulus and better data has paralyzed us in our tracks … we’ve seen this sideways [market] action,” said Art Hogan, chief market strategist at National Alliance. “It feels like we need more action from Congress, and the concern is the longer we wait, the better the data gets and the less impactful the next round of stimulus will be.” Some technical analysts say the market may pull back around the high, to allow it to consolidate gains before moving higher into the end of the year.  The S&P 500 reached an all-time high of 3,393 on Feb. 19. Hogan said he expects stocks to tread sideways during the dog days of August, but they could begin to react negatively to the election in September. He also said it is important that progress continue against the spread of Covid-19, as the economy continues to reopen.

Peter Boockvar, chief investment strategist at Bleakley Advisory Group, said the market could have a wakeup call at some point that the stimulus package has not been approved. “I think it will cross over a line where they care,” he said. “I think the market is in suspended animation of believing there will be a magical deal.” Boockvar said he expects a deal ultimately, but the impact is not likely to be as big as the last round of funding. “What they’re not grasping is any deal, any extension of unemployment benefits, is going to be smaller than it was, and the rate of change should be the most important thing investors focus on,” he said. “Not the binary outcome of whether there’s a deal or no deal. There’s going to be less air going into the balloon.”

It’s the economy

Still, economists expect to see a strong rebound in the third quarter, and are anticipating about about a 20% jump in third-quarter growth. But they also say that could be threatened if Congress does not help with another stimulus package. Mark Zandi, chief economist at Moody’s Analytics, described the July retail sales as a perfect V-shaped recovery, but cautioned it would not last unless more aid gets to individuals and cities and states. Democrats have sought a $3 trillion spending package, and Republicans in the Senate offered a $1 trillion package. They could not reach a compromise, including on a $600 weekly payment to individuals on unemployment which expired July 31. President Donald Trump has tried to fill the gap with executive orders to provide extra benefits to those on unemployment, but the $300 federal payment and $100 from states may take some time to reach individuals, as the processing varies by state. He has also issued an order instructing the Treasury to temporarily defer collection of payroll taxes from individuals making up to $104,000.  “I think in August and September, there will be a lot of Ws, if there’s not more help here,” said Zandi, referring to an economic recovery that retrenches from a V shape before heading higher again. “It’s clearly perplexing. It may take the stock market to say we’re not going to get what we expect, and sell off and light a fire.” Zandi said it could come to a situation like 2008, where the stock market sold off sharply before Congress would agree to a program that helped financial companies.

“We need a TARP moment to get these guys to help. Maybe if the claims tick higher and the August employment numbers are soft, given the president is focused on the stock market, that might be what it takes to get them back to the table in earnest,”  he said, referring to the Troubled Asset Relief Program that helped rescue banks during the financial crisis. He ultimately expects a package of about $1.5 trillion to be approved in September. The lack of funding for state and local governments could result in more layoffs, as they struggle with their current 2021 budgets, Zandi said. Already 1.3 million public sector jobs have been lost since February, and there will be more layoffs and more programs and projects cancelled. The impact will hit contractors and other businesses that provide services to local governments. “The multipliers on state and local government are among the highest of any form of support, so if you don’t provide it, it’s going to ripple through the economy pretty fast,” he said. 

Economists expect to see a softening in consumer spending in August with the more than 28 million Americans on unemployment benefits as of mid-July no longer receiving any supplemental pay. “The real irony is things are shaping up that September is going to be a bad month, and that’s going to show up in all the data in October,” Zandi said. “They are really taking a chance on this election by not acting.”